Credit Report Q&A

Considering Bankruptcy

Dear myFICO,

I've always been mindful of my credit; I have a FICO score of 732. Unfortunately, I've been out of work for 7 months and I can't afford to pay most of my monthly bills. I know filing for bankruptcy will hurt my credit, but I don't see any other options right now. Can you tell me what I can expect to happen to my credit standing? I also want to know if there are things I need to be mindful of as I start to rebuild my credit.

Warren
Columbus, Ohio

Dear Warren,

A bankruptcy is considered a very negative event by your FICO® score and you can expect a fairly large drop to your current FICO score. Typically, someone with a score in the mid 700s might see their score fall by 100 points or more. In your case, this means that credit that was readily available to you might not be – or at least not at the rates you're accustomed to. I'll list a few things to keep an eye on when filing for bankruptcy and explain how to begin to rebuild your credit after the bankruptcy has been filed.

  1. Do your homework. There are several things to think about when considering bankruptcy, such as choosing the type of bankruptcy (Chapter 7 or 13) that's right for you based on your ability to repay your debts, the type of debts you have, and the impact that bankruptcy will have on your future financial picture. It can also be helpful to hear how other people have gotten through similar situations, so I'd encourage you to check out this free online community discussing bankruptcy at myFICO.
  2. Consult with a bankruptcy attorney or a reputable debt counseling service. Because bankruptcy is an important decision that will affect many aspects of your life for years to come, we highly recommended that you consult with a bankruptcy attorney. You may also want to consult a "legitimate" non-profit debt counseling service as an alternative to bankruptcy, as they may be able to arrange a special debt repayment plan with your creditors. Be careful, however, as there are many dishonest debt management companies that charge high fees and provide very little, if any, value toward resolving your credit problems.
  3. Make sure your creditors are accurately reporting the bankruptcy filing. To ensure accurate reporting by your creditors, you'll need to check your credit report after you file the bankruptcy to make sure that only the debts that were actually included in the bankruptcy filing are being reported as discharged through bankruptcy. Another thing you'll want to verify is that all of the accounts that ARE included in the bankruptcy show a balance of zero.
  4. Note the date that your bankruptcy was filed. The credit bureaus have specific rules for when a bankruptcy should be removed from your credit report. In general, Chapter 7 and 11 bankruptcies remain for 10 years and completed Chapter 13 bankruptcies remain for 7 years. I'm not saying you need to count down the days until the bankruptcy falls off of your credit report, but you should know approximately when it should removed or "purged" from your credit report.

After the bankruptcy, you'll want to begin re-establishing your credit as soon as possible. Since you had a pretty good FICO score prior to filing for bankruptcy, you likely understand how to establish credit. Unfortunately, you may have fewer options now than you did when starting with credit simply because some lenders and credit issuers may deny an application when a bankruptcy is listed on your credit report.

A good practice is to obtain a secured credit card. This type of credit card typically includes a credit limit equal to what you've deposited with the card issuer, so it's a bit different than a traditional unsecured credit card. When applying for a secured credit card, make sure the card reports your payment history to the bureaus – this way your good payment history will be factored into your score.

In addition to the re-establishing of your credit history, the other "cure" for a bankruptcy is time. So, be patient and make sure that you continually pay all of your bills on time. By doing so you will gradually see your FICO score begin to recover from the initial drop. We realize that filing for bankruptcy is a difficult decision and hope that this advice helps you through the process.

Sincerely,
myFICO Team

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